The fortunes of Angola’s banks are continuing to split nearly three years after commodity prices began their swift collapse. While the larger private lenders are weathering a challenging economic environment relatively well, many of their state-owned peers are being restructured and recapitalised. Meanwhile, smaller banks of all stripes are feeling the pinch from a stalling economy and a tighter regulatory landscape.
These challenges are unfolding as Angola’s banking sector braces for full Basel II capital adequacy compliance by the end of 2017. Meanwhile, with dwindling quality growth opportunities, the structure of Angola’s banking sector could change in the coming years, with consolidation a likely (though by no means straightforward) outcome.
“There are 29 banks operating in Angola, serving a population of 26 million. In a country with a large informal sector – and by extension, an as-yet unbankable population – there are too many banks chasing too little good-quality business. A consequence of this is the development of a fragile banking sector,” says Janine Dow, senior director of financial institutions at Fitch Ratings.
Success stories
Diminishing oil receipts have led to a scarcity of foreign currency in Angolan markets, affecting many lenders’ ability to offer trade finance lines to their customers and compounding the country’s economic problems. This has come as the termination of US dollar correspondent banking relationships is hitting Angola’s financial system. Addressing these problems, and others, will be crucial if the country's banking sector is to provide the support the economy needs.
Despite these onerous challenges, success stories continue to punctuate the banking landscape. The country’s largest private sector lender, Banco de Fomento Angola (BFA), has registered strong growth figures despite the headwinds buffeting the economy. BFA’s net profits reached $377m in 2016, up from $312 in 2015, while return on assets, at 3.2% in 2015, stood at 5.7% by March 2017.
Standard Bank Angola, the in-country unit of South Africa’s Standard Bank, has also enjoyed strong growth recently. Chief executive Antonio Coutinho says: “Despite the challenges facing Angola’s economy, we have been able to grow our balance sheet but our income statement at a fast pace. In addition, we have lowered our operating costs in a high-inflation environment while our return on equity remains strong.”
With some banks facing concentration risk in the oil and gas and real estate sectors, the hunt is now on for growth opportunities elsewhere in the economy, including in agriculture, food processing and infrastructure development. Banks in Angola are looking to target these sectors by refining existing products and services while developing fresh offerings for their customers.
“Our key priorities are to grow our business, profitability and market share through enhancing our client base and building long-term relationships through a high level of service,” says Sanjay Bhasin, chief executive of Banco Económico. “We will do this both in the corporate and individual segments. We expect to make greater use of technology to serve our clients better while always anticipating and serving client needs.”
Basel II compliance
A more urgent priority for many other lenders, however, will be to meet Basel II capital adequacy standards by the end of the year. According to research from Fitch Ratings, most private sector lenders in Angola will meet these requirements, although at least one publicly owned bank, Banco Poupança e Crédito (BPC), may need additional capital. But assessing the wider implications of Basel II for the Angolan banking sector will require more time.
“We will have to see how softly Basel II is introduced in Angola to determine what kind of impact it will have on the banks,” says Fitch Ratings’ Ms Dow. “Basel II is all about internal models, concentration risk and correlations. So much will depend on what kind of discretion the [central bank] Banco Nacional de Angola [BNA] introduces for these areas. For example, the BNA may decide under its framework of national discretion that public sector exposures are exempt from large exposure limits, meaning that concentration risk might be under-represented.”
These developments come as at least three of Angola’s public banks are being restructured. The largest retail bank in the market, BPC, is enduring a "far-reaching restructuring" according to Fitch Ratings. This process, which is being executed by the minister of finance and the BNA, began in September 2016 and includes an overhaul of the senior management and an extensive review of BPC’s loan book.
The state development bank Banco de Desenvolvimento de Angola, as well as a commercial bank, Banco de Comercio e Industria, are also being restructured, according to Fitch. Standard Bank Angola’s Mr Coutinho says: “Some of Angola’s public lenders are going through a process of restructuring and recapitalisation in the wake of falling oil prices. Smaller banks may be forced to consolidate as the challenging economic environment begins to take its toll in a somewhat overbanked market.”
But any consolidation would be difficult to achieve. As Ms Dow notes, the complicated ownership structures underpinning most banks in the country may be an impediment moving forward. “Consolidation would be complex to achieve in Angola’s banking sector because most banks have a complicated ownership structure, characterised by a fragmented shareholder base,” she says.
Small and suffering
Nevertheless, it is clear many of the country’s smaller to mid-sized banks are suffering. The health of the banking sector is less than rosy, with system-wide non-performing loans (NPLs) at about 15% of total loans in October 2016. Much of this is tied to hydrocarbon and real estate exposures affected by falling commodity prices and the stalling business environment.
“No doubt Angolan banks do suffer from the blight of NPLs, but hopefully it has been a learning experience and the situation will only improve from here onwards,” says Mr Bhasin.
Beyond these challenges, the loss of US dollar correspondent banking relationships is a further difficulty; research from Swift points to a 37% drop in foreign counterparties for Angolan banks between 2013 and 2015. Standard Chartered and Bank of America both terminated dollar services linked to Angola in late 2015, while reports from Bloomberg indicate that Deutsche Bank ended its dollar clearing with the country in late 2016.
The loss of these relationships is pushing up the cost of doing business in Angola and hitting the country’s ability to stimulate growth. As the International Monetary Fund (IMF) noted in its article IV consultation from 2016, Angolan respondent banks can still conduct their own portfolio, treasury and trade finance operations with US correspondent banks but are no longer able to service their customers’ cross-border payments needs.
The IMF says Angola’s lenders are using "alternative payment channels" to overcome this challenge, including nested correspondent banking relationships in US dollars through intermediaries, as well as the use of euros for payment flows out of the country.
On the ground, most bankers are looking to address the issues behind this trend. “We need to engage with global banks and trading entities more to demonstrate the performance of our banks, the degree of adherence to globally accepted compliance norms as well as corporate governance,” says Mr Bhasin. “As a bank we visit overseas banks and find them quite receptive to our business needs, as well as the requirements arising out of our clients’ trade finance activities.”
International perceptions of anti-money laundering (AML) and combating the financing of terrorism (CFT) compliance standards in Angola are low. But the BNA is working closely with international partners and domestic stakeholders to raise standards and improve the country’s reputation. To date, good progress has been made. In February 2016, the Financial Action Task Force (FATF) removed Angola from its list of countries with AML/CFT deficiencies. Further work is being conducted with a regional FATF agency with respect to the risk-based supervision in advance of the next AML/CFT evaluation, scheduled for 2020.
“Banks in Angola are at different levels in terms of their compliance standards. But the BNA is working hard to standardise aspects of compliance and best practice across the industry,” says Mr Coutinho.
Foreign currency dearth
Besides a lack of correspondent banking relationships, Angola’s banks are also suffering from an economy-wide shortage of foreign currency. This is hampering their ability to conduct trade finance activities and effectively service their clients. Though recently the BNA has been releasing additional foreign currency into the market, this has been restricted to certain parties.
“The central bank’s release of dollars into the market has been volatile in terms of monthly averages," says Ms Dow. "In addition, the BNA has a pre-approved list of companies that can access dollars, which has restricted the banks from ensuring their customers, who may not be included on the approved list of names, can fulfil their dollar requirements.”
But despite an overall improvement in the supply of foreign exchange since the end of 2016, there is a significant backlog of demand. “It is likely that the imbalances will continue for some time,” says Mr Bhasin.
Optimism prevails
Though the challenges facing Angola’s banks are as diverse as they are abundant, for lenders weathering this difficult environment there is a sense of optimism about longer term prospects. The outcome of the general elections scheduled this August is likely to deliver new leadership – and with it the hope for an improved policy environment.
“The market, as well as most country observers, see the upcoming election and leadership change as a positive. Hopefully, more business-friendly policies will emerge from this transition,” says Ms Singh.
Beyond the policy environment, most bankers point to Angola’s rich natural advantages, as well as its favourable demographics, when considering the future of their institutions. For banks with a regional footprint, the country offers several enticing long-term opportunities.
“The oil and gas sector is a major part of our business but we are also a bank with a regional offering. Angola is surrounded by markets where Standard Bank has its operations and this positions us as a bank that is able to facilitate trade between these countries,” says Mr Coutinho.
Future promise
In the coming years the government is looking to expand domestic production of key goods and materials in targeted sectors including agriculture, food processing, fisheries and light manufacturing. Moreover, with some major hydropower projects in the pipeline, Angola has the capacity to become a net exporter of electricity. As these business segments grow, there could be ample opportunity for Angola to emerge as a regional centre for trade and investment. For Standard Bank, these trends are promising.
“Our ability to leverage on-the-ground expertise in Angola and its neighbouring markets will be more and more relevant. For example, there are close trade and investment ties between Angola, Namibia and the Democratic Republic of Congo, and these will only grow over time,” says Mr Coutinho.
But to reach this point, Angola must first address its brace of challenges, from improving AML/CFT compliance, to improving foreign currency liquidity in the market. This will require a concerted effort by both the government and the private sector. It will also take time. For now, most market participants acknowledge that the coming year is unlikely to offer any reprieve from many of these difficulties as the wider economy remains at the mercy of oil prices.
“The international price of oil still remains the key issue. As per current predictions, there is unlikely to be a sharp upmove in the price of oil in the next six to 12 months. If that is the case, economic growth will continue to be sober,” says Mr Bhasin.
